The Latest Attempt To Prove Short Sellers Behind Drop In Bank Stock Prices

Since Bear Stearns' collapse in March, Wall Street execs and regulators have been convinced that short sellers were to blame for Bear's stock slide as well as that of several other firms. The New York attorney general, the U.S. attorney in Manhattan, and the SEC are investigating whether traders inflated the prices of credit default swaps to make investors more nervous about the health of the banks that issued them...and thereby drive down those firms' stock prices. The authorities have already noticed that the price of credit default swaps issued by several Wall Street banks rose as their share prices were sliding. Coincidence or conspiracy?

NY Times: In an unusual partnership, New York State and federal prosecutors are investigating trading in credit-default swaps, the insurancelike securities that have come under close scrutiny for their role in the financial crisis.

Prosecutors are looking at whether traders manipulated the largely unregulated market for credit-default swaps to drive down the price of financial shares over the last year, people briefed on the investigation said.

In the swaps market, investors buy and sell insurance protection against defaults on bonds. The cost of the protection, also known as a spread, rises when investors grow more concerned about the viability of companies.

Since the spring, spreads surged on swaps tied to debt issued by Lehman Brothers, Morgan Stanley, Goldman Sachs and other financial firms. Those companies’ shares also tumbled, in part, analysts say, because the cost of protecting their debt was rising.

The Latest Attempt To Prove Short Sellers Behind Drop In Bank Stock Prices

The New York attorney general, the U.S. attorney in Manhattan, and the SEC are investigating whether traders inflated the prices of credit default swaps to make investors more nervous about the health of the banks that issued them...and thereby drive down those firms' stock prices.